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Executive

Jim Griffith - President & Chief Executive Officer

Glenn Eisenberg - Executive Vice President of Finance and Administration & Chief Financial Officer

Mike Arnold - Executive Vice President & President of Bearings and Power Transmission Group

Sal Miraglia - President of Steel Group

Steve Tschiegg - Investor Relations

Analyst

Eli Lustgarten - Longbow

Steve Volkman - Jefferies & Company

Andrew Obin - Merrill Lynch

Mark Parr - KeyBanc Capital Markets

Holden Lewis - BB&T

Melissa Cooke - Calyon

Marty Pollock - NWQ Investment Management

Barry Haynes - Sage Asset Management

The Timken Company (TKR) Q1 2009 Earnings Call April 27, 2009 ET

Operator

Good morning. My name is Christy and I will be your conference operator. At this time I would like to welcome everyone to Timken’s first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Mr. Tschiegg, you may begin your conference.

Steve Tschiegg

Thank you and welcome to our first quarter 2009 conference call. I’m Steve Tschiegg, Director of Capital Markets and Investor Relations. Thank you for joining us today, and if after our call should you have any further questions, please feel free to contact me at 330-471-7446.

With me today are Jim Griffith, President and CEO; Glenn Eisenberg, Executive Vice President of Finance and Administration and CFO; Mike Arnold, Executive Vice President and President of Bearings and Power Transmission Group; and Sal Miraglia, President of our Steel Group.

We have remarks this morning from Jim and Glenn, and we’ll then all be available for Q-and-A. At that time I would ask that you please limit your questions to one question and one follow-up at a time, to allow an opportunity for everyone to participate.

Before we begin I’d like to remind you that during our conversation today, you may hear forward-looking statements related to future financial results, plans and business operations. Actual results may differ materially from those projected or implied due to a variety of factors. These factors are described in greater detail on today’s press release and in our reports filed with the SEC. which are available on our website www.timken.com.

Reconciliations between GAAP and non-GAAP financial information are included as part of the press release, as well as on the investors overview portion of our website. This call is copyrighted by The Timken Company. Any use, recording or transmission of any portion without the expressed written consent of the company is prohibited.

With that I'll turn the call over to Jim.

Jim Griffith

Thanks Steve. Earlier today we released our results for the first quarter 2009. In that release we communicated three basic messages. First, despite market demand levels dramatically below both last year and our own expectations, we reported a small profit in the first quarter.

Second, we also share a view that the impact of the recession on The Timken Company will be deeper than we had previously believed and that despite massive changes in our operations, we expect earnings for 2009 to be around breakeven, well below previous views. Lastly, based on that revised outlook, we have taken action to protect both our balance sheet and liquidity.

This morning I will try to frame the issues which have led to this radical change in our performance outlook; convey to you the actions underway at the company to offset them; and hopefully to convey to you a sense of confidence that The Timken Company is well positioned not only to weather the economic downturn, but actually to leverage it to continue auto-drive to transform our firm into a stronger, more profitable enterprise.

First of all, let me emphasize that the root of the performance issues at Timken in 2009 is market volume. We began the year painfully aware that 2009 would be one of the worst years on record, in terms of global industrial production and things have degraded since.

Production in mobile vehicle markets has continued to decline. Auto production in North America is now expected to be around 8 million vehicles. Class 8 production is expected to be down more than 45% from 2008 and as a proxy for construction and mining, Caterpillar recently reduced its revenue guidance by 30% from a year ago.

On top of that, heavy industry has now fallen. The global industrial production index is projected to be down more than 10% this year, the largest drop of my lifetime. This is further reinforced by a drop of nearly 50% in oil and gas rig counts and most U.S. steel makers are either shutdown or operating at less than half of capacity.

We’ve had an unusually difficult time understanding the impact these trends have on The Timken Company. For most of 2008, much of our business was capacity constrained, especially for large bearing and large diameter steel products. The strong order backlogs in these segments disguise real market demand. We spent much of the early part of the first quarter sorting through these backlogs, to understand how much of those orders were needed by our customers, given the slowing economy.

The results were disturbing; not only was much of the backlog not needed, but once our customers understood the demand from their own customers, it became clear that they needed to reduce their own level of inventory significantly. Therefore, we shifted from strong backlogs to demand well below the current end user demand.

We have balanced our output with actual shipments by implementing a variety of temporary reductions in work schedules around the world. As a result inventories dropped about $65 million in the first quarter at The Timken Company. It’s now necessary to implement more permanent changes.

We have reduced our expectations of 2009 revenue to under $4 billion. We have responded by putting into action a plan that will resize the company to be profitable at that level. This will not only stabilize our financial performance as the economic downturn continues, but will also provide a foundation of greatly improved profitability as demand returns and our revenue begins to grow.

Key aspects of that action plan include doubling the previously announced S&A reductions to $80 million. When combined with actions taken during 2008, this will reduce our S&A costs by over 20% from early 2008 levels.

We are also implementing structural reductions in our factory workforce that will reduce employment more than 25% from early 2008 levels. We have chosen consciously, to make these reductions broadly across our global footprint rather than to close plants. This increases the speed of implementation, reduces the cost and improves our ability to respond when the economy improves.

The combination of these actions will reduce our employment by over 7,000 associates or about 25% of our workforce, compared with the beginning of 2008. Obviously this is a difficult time, especially for those directly affected associates and transitional support is underway. We expect the severance costs associated with those separations to be around $70 million. These reductions will be essentially completed early in the fourth quarter.

We have also taken a series of actions to protect our balance sheet and improve our liquidity. Capital budgets have been reduced to cover maintenance and a narrowly focused set of strategic initiatives. We expect capital spending to be down over $100 million from 2008 levels. We are reducing inventories in both bearing and steel businesses.

We’re drawing down levels in our plants to match current levels of production and implementing structural changes leverage the implementation of Project O.N.E. These actions, combined with reductions in our incentive compensation programs and in discretionary spending, will result in solid operating cash flow.

In addition, our board has decided to reduce our quarterly dividend by 50% to $0.09 a share. We have a tradition of unbroken dividend payments going back 348 quarters and are committed to providing strong dividend returns to our shareholders. However, given the environment, we believe it is prudent to take this action short term to improve our liquidity.

Underneath the challenging times and their impact on our performance, I would like to take a minute to recognize some positive aspects of our business. Our aerospace business continues to perform well in these difficult times. Its sales, profits and operating income margin were near records this quarter. This reflects good execution and reinforces the value of expanding Timken’s participation in attractive industrial markets.

Despite the declining markets, we continue to achieve improved pricing, especially in the Mobile Industries segment, ahead of our 2009 plan. Unfortunately this structural improvement was overshadowed by the reductions in market volume.

Timken associates, both management, professional and operative have shown tremendous dedication, flexibility and resiliency in dealing with the rapidly changing markets conditions. Their willingness to maintain unusual and reduced work schedules and to adapt rapidly to the challenging times, allow us to report far better results than I would have imagined possible in this economic environment; I couldn’t be more proud of them.

I think these bright spots are indicative of our belief that our strategy of transforming our poor portfolio toward attractive industrial markets, while structurally improving our execution ability will lead to long term improvements in performance. Combining that long term strategy with the shorter term actions to resize the company and to protect our balance sheet, should position us for a much more rapid rebound in performance, than in prior cyclical down turns.

Now, I’ll turn it to Glenn to walk you through the details.

Glenn Eisenberg

Thank you, Jim. For the first quarter, the company’s fully diluted earnings per share were $0.0 1; excluding special items earnings were $0.07. These special items included $6 million of after-tax expense, primarily related to severance and impairment charges. The rest of my comments will exclude the impact of special items.

Sales for the first quarter were $960 million, a decrease of 33% from 2008. Significant volume declines across most of the company’s end markets and the impact of lower surcharges and currency, more than offset the benefits of pricing and mix. With the exception of aerospace and defense, volumes were down across Timken’s business segments roughly 25% to 40% from a year ago, with the largest decline in the Mobile Industries segment.

Demand in the aerospace and defense segment was up slightly from the first quarter 2008. Gross profit margin for the quarter was 16%, a decrease of 580 basis points from last year. The negative impact of lower volume, manufacturing under utilization and the timing impact of the company’s surcharge recovery mechanism was partially offset by pricing and mix.

As a result of weaker market conditions, the company took actions to reduce SG&A spending, which was down $38 million compared to a year ago. Margins increased 210 basis points over last year to 14.4%. EBIT for the quarter came in at $21 million or 2.2% of sales, 690 basis points lower than last year. Net interest expense for the quarter was $8 million, down $2 million from last year, due to lower debt levels driven by strong cash flow generation during the past several quarters.

The tax rate for the quarter was 49.2%, compared to 34.2% a year ago, reflecting less earnings from lower tax rate foreign jurisdictions. For 2009, we expect the tax rate to be approximately 43%. As a result, net income for the quarter was $7 million or $0.07 per diluted share, compared to $0.82 per diluted share last year.

Now, I’ll review our business segment performance. Mobile Industry sales for the quarter were $373 million, down 41% from a year ago. The decline was driven by lower demand across all market sectors, especially heavy truck and light vehicle, which were down approximately 50%, and unfavorable currency, partially offsetting these factors was improved pricing.

For the quarter, Mobile Industries had a loss of $25 million or 6.7% of sales, down approximately $55 million from last year. The decline was driven by lower demand and the resulting impact on manufacturing capacity under utilization, which amounted to roughly $100 million. This was partially offset by the benefit of improved pricing and reduced SG&A costs, which totaled approximately $50 million.

Mobile Industries sales for the year are expected to be down approximately 30% to 35%, driven by lower demand across all the segments end markets. The company expects a loss in Mobile Industries in 2009.

Processed Industry sales for the quarter were $243 million, down 22% from a year ago. The decline was driven by lower demand across most industrial market sectors, especially metals, power transmission and aggregates and unfavorable currency. Partially offsetting these factors was improved pricing.

For the quarter, Process Industries EBIT was $47 million or 19.3% of sales, 40 basis points higher than last year. Earnings were impacted by lower volume, mix and currency, partially offset by pricing. Process Industries sales are expected to be down by roughly 25% to 30% in 2009, across most end markets, especially in the heavy industrial equipment sector. Profitability is expected to be down in 2009 compared to the prior year.

Aerospace and defense sales for the quarter were $113 million, up 10% from a year ago. Excluding the impact of the EXTEX acquisition, sales were up 7%, driven by pricing and volume. EBIT for the quarter was $19 million or 16.5% of sales, 950 basis points higher than last year. Improved earnings resulted from pricing and better manufacturing execution.

The company expects the defense markets to remain strong in 2009. While the civil aerospace market is weakened, we do not expect this to impact our overall results in 2009 given our current order backlog.

The company expects the segment to achieve sales growth of roughly 5% to 10% in 2009 and a benefit from the integration of recent acquisitions. Profitability is projected to improve from pricing and manufacturing performance, driving margin expansion in 2009, compared to 2008.

Steel Group sales for the quarter were $249 million, down 42% from a year ago. The decline was driven by lower volumes across all market sectors and a decline in raw material surcharges of approximately $80 million from a year ago.

Steel Group EBIT for the quarter was a loss of $7 million or 2.9% of sales, down approximately $60 million from last year. The decline in earnings resulted from lower demand and under utilization of manufacturing capacity, each costing around $30 million.

Lower surcharge as of $80 million, were essential offset by favorable raw material costs of roughly $50 million and a change in LIFO of roughly $30 million. The company expects Steel Group sales to be down approximately 55% to 65% in 2009, due to lower surcharges and demand. While the company is take actions to mitigate the impact of this decline, the segment is expected to incur a loss for 2009.

The company continues to maintain the strong balance sheet with ample liquidity. We ended the quarter with net debt of $518 million or 24.3% of capital. The company’s liquidity at the end of the quarter was approximately $1 billion, which included $112 million in cash, $571 million of underutilized capacity in committed facilities and $351 million of unutilized capacity on demand credit facilities.

The company does not have any significant debt maturities until February 2010, when $250 million in bonds are due to mature. Free cash flow for the quarter was a use of $14 million, driven by cash flow from operating activities of $37 million, which was due to lower working capital. Offsetting this was capital expenditures of $34 million and dividends of $17 million.

In summary, the company’s outlook reflects the deteriorating economic environment that is expected to trough in the second quarter of 2009 but remain weak into 2010. Timken expects earnings per diluted share for 2009 excluding special items to be in the range of a loss of $0.15 per share, to a profit of $0.15 per share.

As noted earlier, we anticipate lower year-over-year sales across all of our business segments with the exception of aerospace and defense. The decline in sales is expected to be driven by lower volume and surcharges. The company will continue to take actions to mitigate the negative effect of its weak end-markets.

Despite the challenging economy, the company expects to generate strong free cash flow in 2009 of over $100 million, driven by lower working capital. The company expects to generate this cash flow after investing approximately $150 million in capital programs, $70 million in severance related to its cost reduction initiatives and $43 million in dividends, reflecting the company’s reduction in its dividend in the second quarter. As in prior years, the company will consider making additional contributions to its pension plans in excess of its minimum requirements by the end of the year.

While the company will continue to be challenged in this difficult economic environment, we expect to maintain a strong balance sheet with ample liquidity. The actions that we’re taking will position the company to be a stronger more profitable enterprise.

This ends our formal remarks and we will now be happy to answer any questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Eli Lustgarten - Longbow.

Eli Lustgarten - Longbow

Could we talk about how you’re viewing the rest of the year by the various segments, specifically, process which was down 22% in the quarter and you’re going to be down 25%, 30% for the year; it’s about a 19% margin. So are you basically looking at volume level to be relatively flat for the first quarter, but margins to go from like the high teens to the low teens?

Your loss forecast for Steel, is the same way? Do we lose money every quarter? Can you give us some guidance of how you’re thinking about the adjustments and even in Mobile, do you expect to get back to break-even in both Mobile and the Steel sectors sometime in calendar 2009?

Mike Arnold

Yes, Eli this is Mike. Let me take your question around process at least first and then I come back and talk about any of the other segments you want to talk about. The process side of the market actually is still declining. I think as we talked about last quarter, we saw the Mobile side of the business go pretty aggressively out towards the latter part of 2008.

Process, if recall there’s a lot of our businesses in the metal side of the marketplace, both from the standpoint of original equipment and aftermarket and that was down very heavily in the first quarter and to a certain extent still declining. The good side of that is at least the Asia perspective, from a process standpoint.

In China, we actually were above where we thought we would be in the first quarter. So, there is a little bit of strength there on some of the incentives that are being provided from the government, their infrastructure builds and so we believe that China will actually continue to grow.

The rest of the process markets actually continued to weaken and a lot of that comes out of the distribution side of the business, which is a combination of not only the revenue from the marketplace deteriorating, but everybody is taking as much inventory out of the channel as possible. So that goes for end users, distribution channels themselves, than the course back into the OE’s.

So, I think as we look through the remainder of the year, you’ll see some degradation on the top line from process, throughout the next two quarters and then probably a leveling from there, versus where we’re in mobile. Mobile, actually we’ll begin to see some appreciation with respect to top line revenue, but very different by market segment.

The heavy truck markets, as well as the off-highway and rail continue to deteriorate actually going into the first quarter, while a lot of the light vehicle side actually began to prop itself up a little bit as we move through the first quarter, at least into the second quarter.

Eli Lustgarten – Longbow

As far as the margin’s profitability of process, is that going down to the low teens to hit the bottom and can mobile get to a breakeven sometime this year?

Mike Arnold

Well, we don’t believe that mobile will get to a break even this year again, based upon the mix of mobile, which is now a deterioration in the revenue of those markets that actually is attractive within the mobile segment. The process will be a slight deterioration, probably the worst in the second quarter and then an appreciation back up, maybe towards the middle teens, a little bit better than that by...

Eli Lustgarten – Longbow

Well, those are the low teens in the quarter and then back to the middle teens; is that the kind of thing we’re looking at?

Mike Arnold

Yes.

Eli Lustgarten – Longbow

As far as the steel industry goes?

Sal Miraglia

Yes, we believe that the second quarter is probably going to be our weakest quarter. The demand in just across all of our markets has been very, very low. Especially so industrial and oil and gas, where we believe customers are now making their own inventory adjustments.

We expect we’re going to stay poor through the third quarter, but then begin to feel a bit better towards the last quarter of the year. Not so much because the economy will recover, but we think that the inventory adjustments will have reached their endpoint and then customers will begin at least ordering their consumption level or replacement, but we’ve seen it pretty generally across all our market segments at this stage time.

We have one more negative kind of magnifying that and as you’ve heard others report, because the demand has gotten so low, we have a great and I’ll use the word intentionally, ‘hangover’ of higher cost raw materials, just because we’re not depleting it at the pace we expected as a consequence of the weakening order pattern and that simply adds to our cost of sales during this period of time, coupled with unutilized assets because of the weak demand right alongside of it. So it’ll take us through to the end of the year before we see that improving to any considerable extent.

Eli Lustgarten – Longbow

So just to follow up, there would be loses every year and the LIFO profit’s supposed to be about $30 million a quarter, is that the indication of the first quarter?

Sal Miraglia

No, I think Eli in the first quarter we had LIFO income around $12 million. So that will be indicative for each of the quarter, plus or minus.

Operator

Your next question comes from Steve Volkman - Jefferies & Company.

Steve Volkman - Jefferies & Company

Could we talk a little bit about pricing, which has obviously continued to be pretty positive? Should we expect that to continue going forward even as some of these raw materials come down and how should we think about that I guess sort of on a quarterly basis as we project through the year?

Jim Griffith

Steve this is Mike, from a bearings and power transmission perspective, as you all would know a lot of our businesses, contractual obligations other than really the distribution side of the business most of that for 2009 is strong, and has been good across all of our markets at least at this point.

Sal Miraglia

Yes Steve, our base pricing in the steel business has not seen any weakening at all. However, as you’re aware, the raw material issues have been handled by surcharge mechanisms and frankly from the customer’s point of view, they’ve seen dramatic price reductions at the transaction level, because the index upon which the surcharge is based has come down dramatically, nine fold, since the peak of last year.

So, there’s two different aspects of that pricing. Our base is staying pretty steady at this stage in time. We expect we’ll probably get some nibbling at that because things are pretty weak right now, but at the transaction level our customers have seen a radical change as a consequence of the raw material cost reductions.

Steve Volkman - Jefferies & Company

Then I guess Jim, in the distributor business, are we seeing any signs of pricing issues from competitors?

Jim Griffith

I’ll let Mike take that.

Mike Arnold

Steve this is Mike. Any time you go through a down turn, you’ll have competitors grasping for volume for the manufacturing facilities, but in general the distribution markets that we play in, across the world are not very price sensitive; whether that is in extremely up markets or very difficult markets like this.

Steve Volkman - Jefferies & Company

Then just maybe one follow-up on the cost saving that you guys are doing; how should we expect it to sort of unfold over the next three quarters? I assume sort of increasing a little bit each quarter, but any guidance you could give us would be helpful.

Jim Griffith

Yes Steve, I think it’s a fair comment. The numbers that we provided are with the annual benefit of what we’re enacting. Most of the program that we’re doing will be completed by the middle of this year. So, you’ll see the bigger or the heavier weighting of the benefits in the second half of this year and then the full extent of it throughout 2010.

Operator

Your next question comes from Andrew Obin - Merrill Lynch.

Andrew Obin - Merrill Lynch

I do share in Eli’s sentiment that the execution of the quarter was much better than the guidance, but with that aerospace has been one of the strength and could you guys please comment on what you’re seeing in terms of your order book, particularly going into 2010?

Mike Arnold

Andrew, this is Mike again. If you just take a look at the aerospace side and I’ll just remind everybody that our aerospace business is somewhat different than many of the aerospace businesses you may look at. It is highly dependent upon the military, the defense side of the marketplace and also the aftermarket as we have transformed that aerospace business from a primarily original equipment based business to the aftermarket.

So, that actually continues to he remain relatively strong for us. We don’t see the deterioration quarter-on-quarter going out through 2009. In fact, I think at a revenue perspective, we’d see that to be relatively flat throughout the remainder of the year. Our performance though from a standpoint of operationally how we’re performing continues to improve year-on-year, so we’ll see an improvement in 2009 versus 2008; that will be good.

So, I would tell you that the backlog, although coming down on the civil side of business is remaining strong, on the defense side we’ve changed the look of the business more towards an aftermarket based business. Our pricing has remained strong. So all-in-all, 2009 will still play out to be a good year for our aerospace business.

Andrew Obin - Merrill Lynch

Can you comment on what book-to-bill looks like now or?

Mike Arnold

Well, we typically would run a backlog in our aerospace business of upwards of 14 or 15 months. So to the extent that our actual lead time to produce product is significantly less than that, obviously we still have backlog well in excess of what our current lead times are. So we would see the order rate at least in this side of the business to still be significantly greater than any cancellations that we’re seeing in the industry.

Andrew Obin - Merrill Lynch

I guess I’m a bit confused. So you said your usual backlog is sort of roughly year and a half, is that fair?

Mike Arnold

That’s what we came out of over the last three, four years.

Andrew Obin - Merrill Lynch

Are you saying that right now, it’s quite a bit lower than that?

Mike Arnold

No, what I’m saying is our lead times to produce are obviously lower than that. We’re beginning to see some deterioration on the backlog of business on the civil side of the business. That is a relatively small part of our aerospace business. So, the defense side in the aftermarket is staying relatively strong.

Andrew Obin - Merrill Lynch

So, usually lead times have been over a year and they’re shorter than that right now, is that what you’re saying, I’m just trying…?

Mike Arnold

From an operational standpoint Andrew, our lead times into the market would be typically six months. The issue over the last three years, where demand has greatly exceeded capacity, has driven those lead times out to as long as 14 months.

Andrew Obin - Merrill Lynch

Now we’re back to six months?

Jim Griffith

No, we’re not quite back to six months yet, but we are headed in that direction.

Andrew Obin - Merrill Lynch

Just talking to your customers and I understand that it’s very hard and you guys sort of were faced with this destock, because what I’m hearing from a lot of the companies that I cover is that manufacturing just effectively shutdown in the first and second quarter. I mean just talking to the customers, when do you think people will start reopening factories? When do you think people will get into the order mode again? I know it’s very hard to tell at this point, but do you think we are at the bottom for that process or where do you think we are?

Mike Arnold

Andrew this is Mike. I’ll take it first and then pass it over to Sal. It varies by industry and I think that’s the important thing. If we take a look at the mobile industry, we’ve got pieces of the mobile industry, which is more the light vehicle side; where we’ve actually seen some bottoming and in fact we’re seeing positive orders moving forward. So there is some activity there.

On other parts of the mobile industry, which is the off-highway and the rail in particular, we’re still seeing degradation from the standpoint that our customers are taking their capacity out. In the short term they’re driving inventories lower and they’re anticipating still further weakness in their market. So we still see that happening in exactly the same business, so one side actually picking backup, the other side is still going down.

Process Industries; again, very similar to the off-highway and rail where businesses are not only shutting down and taking operational time out on a monthly basis, but they’re driving very hard to get their inventories inline with what they think the business will look like the remainder of 2009.

So, it’s giving all of us from a parts supply standpoint, a kind of a double whammy in our first half and we believe as I mentioned to Eli earlier in the call that the second quarter will probably be the toughest for us and then most of the inventory will be weaned out of the channel; customers will start looking to any up tick in the market and we’ll relatively remain flat until that up tick begins.

Sal Miraglia

Andrew this is Sal and again, not too much difference. As you recall, our Mobile on highway adjustments began middle of last year. We’ve actually seen that strengthen here in the last month and even with the announcements we’re hearing, we expect it will stay that way; however, the other market segments are still on the decline. There’s no gas drilling going on right now, there is pipeline there that has got fund intended, but that pipeline has got to see itself diminish for some period, it will take a while.

The large industrial customers, they’ve already talked about needing to get their own inventory pipelines weaned bit right through their dealerships. Many of them speak in terms to of several quarters, but when you back away from that, they’re need to plan for restarting their production. We’re guessing that towards the latter part of the third quarter, into the fourth quarter, we’re going to start seeing at least consumption level orders return unlike what we see right now, but that’s our best judgment as of right now.

Operator

(Operator Instructions) Your next question comes from Mark Parr - KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

A lot of good color on the environment; it sounds to me just to summarize what you’re saying is that you’re seeing early cycle industries kind of acting early and some of the later cycle or coincident industries are being a little bit more delayed in terms of destocking.

I was wondering if you could discuss a little bit, your plans for the refinancing of the debt. Are you going to just pay-off that debt? Are you going to refinance it? What are the capital markets telling you right now; would be the best options for that situation?

Jim Griffith

Hey Mark, I guess there are two things that we’re focused on from a capital market standpoint. One is we have our main credit facility, which is a $500 million facility that’s essential unutilized right now, is due in June 2010 and so, normally we’ll go in the normal course, look to have that refinanced before it would go current, so by June of 2009. So we’re actively talking with our bank group to go ahead and do that. Once we have that that will now be a facility that will be extended several years.

So once we have that in place, the first maturity that we have again, are our bonds. There’s $250 million that are due in February of 2010. Between the cash that we have and the cash that we expect to generate, we could obviously look to pay it down in cash. We’ll have our main credit facility available to us, so that’s a back stop as well, but our current thinking that was between having our main credit facility done in those time bonds would mature, we would look to go out into the bond market and effectively go ahead and refinance it that way, but we have several different avenues we can pursue.

Again, just as we go through on the time standpoint, we’ll decide which lever we pull and frankly which of the different markets that are most attractive for us to take advantage of.

Mark Parr - KeyBanc Capital Markets

Okay, I appreciate that. Hey Sal, I was wondering if you could talk a little bit about the demand outlook. It just sounds like your full-year revenue outlook may be a little bit lower than some of the other outlooks I’ve been looking at and I’m wondering if competitive issues are perhaps playing a role in your conservative outlook, more than just the underlying demand scenario.

Sal Miraglia

Actually Mark, I don’t think so. Again, remember that the small niche of the marketplace, in which we participate, compared to the full line participation by some of the other folks in the industry that you follow very closely. Quite frankly, we actually think we’ve gained market share in this particular environment, because we’ve operated in such a way that we’ve retained all of our production pathways open, so we could be responsive to any customer demand and our lead times are the shortest that we’ve ever had within the history of our company.

A big piece of the revenue shortfall is the pure collapse of the value of the raw material and the surcharge that goes with it. So if you compare our actual expectation of tons to the sales to the dollars, there’s a bit of a disparity there, because the costs to the customers and therefore the sales level goes down quite a bit. I think you should be seeing that if you’re looking at any kind of projections across any of the folks in our industry because of that dramatic change relative to that.

Mark Parr - KeyBanc Capital Markets

What sort of tons are you looking for this year?

Sal Miraglia

Well, we haven’t really predicted that. It’s in our overall projection for where we think the year will be, but quite frankly it’s probably going to be close to half the level of what it was last year.

Mark Parr - Keybanc Capital Markets

Have you commissioned the small bar mill, the upgrade you were doing at Horizon Street.

Jim Griffith

Yes, that’s commissioned. We are still in the process of getting validation with many customers, but still, believe it or not, customers are very interested in it because of the capabilities and the qualities of the line the big issue, they don’t have the volume either. So, our expectation is our startup is going to have far less volume than we had originally in the business case for that, but still with very keen interest and with significant ordering for the size of the market that’s available; even yet in 2009 with growth in 2010.

Mark Parr - Keybanc Capital Markets

Has the shutdown of Inland bar mill and I guess one of the max steel mills is curtailed right now. Are there one of them or two of them that are down?

Jim Griffith

One mill is down completely on the hart operations and the other mill is operating only about 35% to 40%.

Mark Parr - Keybanc Capital Markets

Have you benefited from those shutdowns?

Jim Griffith

Well, a little bit from the point of view of the capacity in the marketplace. The Inland or Asheboro plant really is merchant for our products and it doesn’t have a direct impact on us, but to the extent if that takes pressure off the raw materials markets and it takes pressure off other mills who seek to replace that business, we feel some of the knockoff effects of that, but in a market that’s as weak as it is, it’s not enough to compensate for much in terms of the total demand of the market space, but that mill did very little in the energy market area. It was mostly in structural and merchant quality products.

Mark Parr - Keybanc Capital Markets

Just one last question, Can I get your take on where you think the May scrap buys will come in relative to April?

Jim Griffith

Yes, that’s a great question. Currently we’re in the high hundreds on average and I guess it’s going to kind of stay in that territory, even though the export prices are going, I won’t say crazy, but up high. They’re in the mid 200s at this stage in time.

For us in the middle of the country here, the freight costs are so high for our local suppliers to get it there that they become noncompetitive, even if they go south through New Orleans at this stage and so we think we’re going stay fairly steady and those high hundreds maybe coming close to $200 ton on average.

Mark Parr - Keybanc Capital Markets

So, moving scrap to the coast isn’t much more than $30 bucks, is it?

Jim Griffith

That’s right, but when you consider all the hands that it passes through in order to get there, it adds a little bit more to it than that. In fact, some of the yards that are close to the actual shipment areas are acting as accumulators and brokers right now. So, it just makes it a bit more expensive for them and because the prices of where they are, the gatherers are not very active right now. So, they don’t have a lot filling into the book we are at either.

Mark Parr - Keybanc Capital Markets

Just to kind of take this, Mike, I was wondering if you could comment on raw material costs and what you’re seeing for ‘09 versus ‘08 and then I’ll pass it on. Thanks for all the color.

Mike Arnold

Yes, raw material costs are down across the board. Unfortunately, we’re not seeing all of that impact, because as we reduce inventories throughout our manufacturing facilities, we’re not buying as much raw material as you might have thought, but raw material costs are down across the board.

Operator

Your next question comes from the line of Holden Lewis - BB&T.

Holden Lewis - BB&T

Can you just comment, it seems like the volume levels, at least sequentially fell pretty dramatically, Q1 versus Q4, yet you were able to get a sort of adjusted gross margin that was a little better and quite frankly, I think that in mobile your loss was narrower again, despite meaningfully lower revenues. So just sort of curious, what were the pieces that were in place that allowed you to sort of perform on the margin, both in terms of gross and mobile better sequentially, even though the revenues continue to erode?

Glenn Eisenberg

Yes, Holden, on the mobile side, I think there were obviously two key things to the up side. One was, the continued strength in pricing that we’ve talked about now for probably the last year and our movements with regards to fixing or exiting different parts of that business and then our cost structure and the cost management, we’ve been very, very aggressive in reducing the operational side of our business, as well as S&A reductions.

I would say that as you look at that volume and the impact of also the in absorption of many of these manufacturing facilities as we’ve taken them down, the upside has been still very aggressive; cost reduction and repricing of the industry.

Holden Lewis - BB&T

So, when you look at the mobile, if you’re assuming that you’re seeing some orders tick up a little bit and so maybe the volumes in this particular quarter for mobile might be at or around the lowest you see. Pricing is going to stick; you’re doing more cost cuts. Is it expected that that $25 million loss, that might be the worst number this years and then you just may continue sequential improvements in that number. Would that be the expectation for mobile or did the other businesses now begin to offset, what you’re seeing in automotive?

Jim Griffith

Given everything that we’re seeing in the industry and the question marks around the GM shutdowns and bankruptcies, etc., I think we’ll still see a tough second quarter and then we’ll see the margins begin to improve in the third and fourth quarter.

Holden Lewis - BB&T

Okay, even though there is usually seasonally, I think Q3 is usually softer in automotive?

Jim Griffith

That’s correct, but now you’ve got again you’ve got automotive is just a piece of that mobile business where you’ve got the off-highway and the rail and these kinds of industries and also the automotive aftermarket in there.

So from a revenue perspective, I think looking at mobile throughout the remainder of the year, it will be just slightly up from a margin perspective; we still have a rough go of it in the second quarter and then I think we’ll see some improvement in the margins in the third and fourth.

Holden Lewis - BB&T

Then just following along that line, in some of the math for instance in mobile industries in your release, you talked about under the utilization costing a $100 million reduced selling and pricing benefiting about $50 million, which would get you to about a negative 50, but you reported a negative 24. I think the math worked the same way in the steel business what you gave it. What are the missing pieces?

Glenn Eisenberg

Those were discussing the changes in the profitability. So, when we looked at the mobile, while they were down $25 million in earnings, they were down $55 million compared to the year ago and I think the release addresses what resulted from those changes. So, the volume and the manufacturing un-absorption call it down pricing estimates.

Operator

Your next question comes from Melissa Cooke - Calyon.

Melissa Cooke - Calyon

I’m going to ask my usual questions about Asia, and I’m most interested in China and India. What you are seeing in terms of orders related to government stimulus and is that offsetting decline orders from the private sector, and also if you could talk about the ramp of your capacity in various places, how is that going and are you slowing that down? Thanks.

Mike Arnold

Hi Melissa this Mike. Let me take China first. Yes, from a stimulus perspective, we are seeing the benefits of the stimulus plans on the infrastructure expansion in China versus what would have been typically the export oriented market. So as China isn’t as strong as it was previously, it actually was slightly better than we expected for the first quarter and then for the remainder of 2009. So we’re seeing it there. It’s tied directly to many of the industries that we play and the investments that we’ve made, so that is the one positive area.

If you look at India, and India is a little bit of different of a story especially with the elections going on there. There has been at least a local deterioration with respect to the market. We still see some infrastructure spending going on in India, hence we’ve put some new capacity in there and so I think that will be a better long term story than it is a short term story from.

Then from a capacity standpoint, as we put the new capacity in, most of that went into Asia. There were two reasons for doing that. One was, obviously to drive a match to producing in the currencies and the locations in which we sell and so the rapid growth of Asia required the rapid growth of our capacity in Asia.

The second part of that is as we look at our long-term cost footprint of manufacturing, we have continually driven that to lower cost areas of the world and as those have matched up for our growth plans has been very good. The ramp up of our capacity has gone very well. That’s the good news.

The bad news is we’re not going to get to use a lot of it, as we’ve ramped it up, but this combination of putting it where it should belong term, putting it in the cost structure and it should belong term and the capability ramp-up has actually gone very well in excess of what we had actually planned and expected.

Operator

Your next question comes from Marty Pollock - NWQ Investment Management.

Marty Pollock - NWQ Investment Management

I wonder if you could talk about the cost benefits of the employee reductions. You are talking about, at the same time you were mentioning severance costs I mean the cost of reductions. Can you talk about the benefit that you could see perhaps in the next few quarters and lined up against those costs? Are severance costs going to be essentially running through the income statement as a normal operating side, where any charges involved with that?

Glenn Eisenberg

Well, Marty this is Glenn. We have in the and our expectation is that this year we’ll take around a $70 million of charges associated with severance and that will show up in our obviously P&L through our reported earnings.

When you look at the benefits, we’ve talked about just the SG&A benefit of targeting around $80 million. The severance is not just solely for the S&A, but for other operatives as well throughout the company. So, the relative to cost versus savings is actually, pretty positive. So from the standpoint for 2009, there’s not going to be a big net benefit because you are incurring of those costs.

Once you go into 2010, you’re going to get the full benefit of that, which will last and again a lot of these costs are structural, clearly some of them are going to be just be a function of dealing with the variable nature and the environment we’re in and will come back, but a lot of the changes again are structural, which will stay with us.

Marty Pollock - NWQ Investment Management

The incremental number, I mean the number of employee reductions this year versus the original 7,000 you were describing, how many employees are actually leaving the company this year?

Jim Griffith

Marty this is Jim. We’re probably between 50% and 60% done with that at this point. So that includes, we talked at the end last year about 2500 people have left and we’ve continued to reduce employment on a permanent basis in the first quarter. So, we’re somewhere beyond halfway done with it.

Marty Pollock - NWQ Investment Management

With regard to what you describe as structural change in your breakeven, in the event that we do, when we get the recovery, what do you think that you are going to be able to capture the entire upside or in a sense are you cutting some more than just that, but possibly into the bone here?

So, what would be the operating leverage that you could gain? Simply, is it just changes within the overall structure of the costs that the company will be managing at that time or can you just describe that a little bit in more detail?

Jim Griffith

Marty, let me see if I can respond to it in two ways and then if it helps, I’ll ask Mike to come in and talk a little more about what’s going on in bearing manufacturing.

The first answer is, we’re taking our S&A costs down and we’re doing it structurally meaning, we are taking people out, we are redoing the organization and we’re preparing to us operate at a lower level of absolute overhead costs, and we’ve given you kind of numbers on that questions on when does the benefit begin. Well it really began January 1, because we already were implementing cost down metrics and hence the better first quarter performance than volume would have indicated.

From a bearing manufacturing point of view, which is where the majority of the other changes are, we have gone through and taken out both fixed cost and variable costs across the plants of the world in preparation for coming back in a different operating approach that will allow us to operate more flexibly with the demand of our customers.

Because remember, we are not just doing an operating change, we’re doing a business mix change, shifting the business more toward higher margin, industrial products from the high volume automotive products. If you want a little more color in that maybe ask Mike to come in and explain it a little more depth.

Mike Arnold

Yes Marty, couple things that we’ve talked about over the last couple years actually that will help us on the leveraging of an up market. You will recall that over the last four years we’ve been through the implementation of our Project ONE, which was defining completely different business processes, adapting SAP to that and driving a very different operating model throughout our business.

A downturn is a great time to test the structural capability of what we’ve put in and so that is a huge part of getting us in more efficient, and more effective as to how we run our business and in the sense of moving more away from the automotive type industries to the industrial type industries and defining with that model is and coming backup out of this downturn much stronger.

We’ve been driving lean throughout all our manufacturing facilities. You would know that certainly from any coverage of industrial based companies, but also at the same time to give you a feel for your question earlier, in ‘08 and ‘09, combined we’ll probably take someplace between 5,000 and 6,000 people out of our manufacturing operations and that’s a significant move, not only to look at the volume or to align ourselves with the volume that we’re getting from the marketplace, but that is always reflection too of being more efficient and effective as we come up out of this downturn.

Two other things that I would mention; one, reiterating Melissa’s question with respect to our manufacturing footprint and where it will be around the world, according to where our customers are around the world, so that has moved pretty well. Then some specific efforts around product cost reductions and all these things are great times to do them in a down market so that you can come up out of the down market into an up market much more profitable.

Operator

Your next question comes from Fritz von Carp - Sage Asset Management.

Barry Haynes - Sage Asset Management

Hi, actually this is Barry Haynes with Sage. Just following up on the manufacturing footprint, I’m not sure if you said whether specifically you’re going to close any of the manufacturing footprint and if so, how many square feet might you take out relative it to the base? Thank you.

Mike Arnold

Yes, Barry this is Mike. On the Bearings and Power Transmission side, we have not announced any closures at this point. We have been driving all of our facilities to a much smaller capacity utilization range from a cash perspective that’s the right decision to make in 2009 and we’ll ride out 2009 very much that way.

We will make some decisions in 2009 as to both the length of this recession, but also what the recovery looks like, what capacity will be required, then we’ll make some decisions with regards to fixed assets at that point.

Operator

(Operator Instructions)Your next question comes from Holden Lewis - BB&T.

Holden Lewis - BB&T

We’ve spent fair a bit of time talking about sort of cost reductions in the Bearings business. Can you touch on Steel a little bit? I’m interested in getting a sense of what the break-even level is for that and noting that the last time, I guess that you slid into a loss on Steel was back in. I think 2003 and you had about close to $900 million in revenues and a slight loss.

Is that business in such a shape that $900 million in revenue is kind of the number that we should think of for breakeven in steel or have there been some dynamics that might be shifting that up words or downwards?

Sal Miraglia

I think, Holden this is Sal, I think from the point of view of the structural performance of the business, we’ve actually improved the breakeven point from the point of view of the volume. I would be careful about comparing it to sales dollar levels though, because of this dynamic we’ve had vis-à-vis raw material inflation and what it did do to the picture of the sales volume.

We believe we’re at a breakeven point now where about 50% of our utilization would put to us breakeven level. That’s far better than we actually thought it would be. There are some pressures on the upside in terms of basic labor agreement costs, etc., that had been built in. This happens to be year that we have basic agreement negotiations as a matter of fact, but having said that I think we’re actually better off than we had been.

I recall also that we’ve done a number of things to change the structural cost of our operations. We closed some very marginal business that were a little slightly profitable in strong markets, but very negative in weak markets. We had a preceding components operation in Europe that is no longer with the company. We closed a tube making plant in desperate, England which struggled entirely because of currencies for an awfully long time.

We have divested the [Inaudible], which had very variable returns under those periods of time. So when you look at the actual sales dollars and cost structures, there’s been quite a change that’s occurred within the operation and the organization during that period of time, specifically the time that you quoted with the $800 million level from that perspective.

Holden Lewis - BB&T

Okay, so all that said, what level of revenue would you have needed to see in ‘09 specifically, so that will keep most things reasonably static in order to have broken even?

Glenn Eisenberg

Well, again revenue is not the number we’ve got to worry about here; it’s the level of profitability that we have there. We’d actually be able to breakeven at that kind of revenue level with normal scrap costs. Our big problem in the current period, in addition to the lack of volume is that we’re still using very expensive raw materials that are a hangover from last year. Had it not been for that we think we’d be even now.

Holden Lewis - BB&T

Okay. So, yes if you were using current market price scrap in your operations right now you think 750 to 800, you’d be able to make money?

Glenn Eisenberg

Without a doubt.

Holden Lewis - BB&T

Okay, but you don’t think that you’re going sort of get to those scrap levels until the end of the year?

Glenn Eisenberg

We think that the, when you look at that way these dollars work their way through the system, even though we have very short lead times, that this scrap hangover will go into the third quarter, maybe to the end of the third quarter. All depending on what the replacement levels of customers happen to turn out to be. If they start ordering earlier that will happen quicker.

Holden Lewis - BB&T

When you think about your equity levels right now, I might have missed this I apologize if I did, but are you looking at a number of assets that might need to be written down at this point, further impairments, I mean pension. What are the significant risks right now to sort of your equity balances?

Jim Griffith

Holden, I’d say that when you look at what could hurt the equity, clearly pension. We’ve taken through that’s probably been the single most issue negatively impacting the equity which we took last year in the environment. Where we currently stand, our asset returns are a little bit below, where our called assumed returns would be currently, but interest rates are higher. So, net-net we feel those would wash each other out, so based upon today there would be no further reduction equity from pensions.

From impairment issue as well, we took a goodwill charge last year related to our mobile industry group. We continue to evaluate that as we go forward, but at this stage don’t envision that there would be anything further there. So again, other than just the normal course, we feel pretty good about where we stand, but it’s always subject to the environment that we’re dealing with.

Operator

(Operator Instructions)Your last question comes from the line of Eli Lustgarten - Longbow Research.

Eli Lustgarten - Longbow Research

Just a follow up, with the structural step down of costs that you’re taking, is there any implication for what you’re feeling for demand levels of 2010. It sounds like that you’re expecting things to modestly improve, but nothing radical and your new system will still allow to you take advantage of the greatest strength than you anticipate?

Jim Griffith

That’s well said, Eli. Our view of 2010 is that we should see a slight improvement from 2009 based on the inventory coming out of the system. We are preparing on the basis for that and also preparing in case that doesn’t happen. We will have the capacity to deal with the market if the market is stronger than that.

Eli Lustgarten - Longbow Research

If structural changes are more in the execution, not just production side, that shouldn’t be affected at all?

Jim Griffith

That’s correct.

Steve Tschiegg

This is Steve Tschiegg. Before we end today’s call, I’d like to turn it over to Jim for any closing comments.

Jim Griffith

Thank you again for your interest and investment in the Timken Company. Obviously, the results of our earnings release speak for themselves. I’d like to close just by reinforcing the strength of our balance sheet, the strength of our cash flow, the success that underlies it in terms of the transformation toward businesses with stronger margin as evidenced by the performance of process in aerospace.

Obviously, we’ve seen a drop in demand in typical Timken fashion we’ve taken a conservative outlook on the future, put a plan in place to deal with it. Look forward to getting it done and being back to talk to you on a positive performance trend. Thank you.

Operator

Thank you for participating in Timken’s first quarter earnings release conference call. You may now disconnect.

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Source: The Timken Company Q1 2009 Earnings Call Transcript
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